Busy year ahead for Massachusetts credit union mergers

Small credit unions in Massachusetts that don’t do much lending, and have depleted their capital to stay afloat, are now searching for rescues. The likely result: a surge in merger activity this year.

Like banks, credit unions have been slogging through years of low interest rates that make earning loan income difficult.

But banks aren’t racing to merge: Experts say hesitant boards of directors at Massachusetts’ mutual banks will largely spend this year on the sidelines.

Credit unions, on the other hand, are generally smaller, have less available capital and many operate on an obsolete business model serving specific employee or trade groups in limited geographic areas. Also, several do almost no mortgage lending, and simply can’t get by on the interest earned on auto loans.

For instance, Fenwal Credit Union in Ashland plans to merge this spring with Chelsea-based Metro Credit Union, giving Metro its second operation in MetroWest. Fenwal has one employee, only $1.8 million in assets (mostly used auto loans), and writes no mortgages.

At 61 of the 204 credit unions in the state, including Fenwal, non-interest expenses exceed total interest income. That is, the overhead is more than the interest they collect from loans.

“If they have a robust lending program, they’re OK,” said Daniel Egan, president of the Massachusetts Credit Union League. “But if they don’t, they have a hard time generating income and they deplete their capital.”

The Fenwal merger will be Metro’s fourth since 2010. Metro’s last merger was with the Massachusetts State Employees Credit Union last spring, a deal that brought Metro to 300 employees and 14 offices.

On average, credit unions are quicker to feel and react to income and regulatory pressures than banks because of credit unions’ relatively small size, said Kevin Handly, an attorney at Pierce Atwood in Boston.

“The pressure is financial in the sense that the cost of doing business has gone up substantially,” Handly said. “Many smaller institutions’ ability to earn money has not kept pace.”

Small credit unions in situations similar to Fenwal’s are actively seeking merger partners, and bigger credit unions such as Metro are receptive to their advances.

Premier Source Credit Union of East Longmeadow is much smaller than Metro, but also growing through a merger this year. Premier Source, which was founded in 1941 to serve employees of an envelope company, is already the product of several mergers and name changes. But Premier isn’t much bigger, based on assets, than its latest prospective merger partner: Wemelco, a Springfield-based credit union that serves employees of Northeast Utilities, ISO New England and the International Brotherhood of Electrical Workers Local 7.

However, Premier’s field of membership isn’t restricted, and it has about twice as many members as Wemelco, which holds about twice as much in deposits as it has out in loans.

For credit unions in that position, new regulations imposed during the past five years by the National Credit Union Administration in response to the financial crisis could be the last straw. The NCUA has new regulations covering documentation, data tracking, financial reporting and monitoring, for example.

“There’s going to be continued consolidation in the industry,” said Robert Cashman, Metro’s CEO. “All the new rules and regulations are taking their toll, more (of a) toll than the economy. The paperwork, the technology, the human resources — it’s difficult to do when you don’t have the scale or the scope. You have to think about exit strategies.”